Selective Punishment

June 16, 2010

There is a need to ensure that SEBI’s adjudication and investigations processes are fair, transparent, detailed and open to public scrutiny

On 9th June, television tickers announced that Manmohan Shetty, former chairman of Adlabs, had been fined a whopping Rs1 crore for violation of insider trading rules. It made most people sit up. Was the father-in-law of Member of Parliament (MP), Milind Deora (son of petroleum minister, Murli Deora), caught in an insider trading case? A look at the order shows that it is no such thing. Mr Shetty has only been in a hurry to sell shares and did not wait for the mandatory 24 hours after the Adlabs board made a demerger announcement in April 2006.

The order clearly says that the shares were sold after the announcement was made to stock exchanges and released to the public. Did he make any wrongful gains? Not really. Why didn’t the case then go through the now routine consent proceedings where a penalty is paid without admission or denial of guilt? Apparently, Mr Shetty did file consent proceedings, but the Securities and Exchange Board of India (SEBI) officials in charge rejected his offer of a few lakh rupees as payment under the consent terms. They wanted him to pay nearly Rs1 crore, slapped on him by the adjudicating officer.

So was SEBI making an example out of Manmohan Shetty in multiple ways? One signal seems to be that it is unconcerned by Mr Shetty's political clout (which actually appears non-existent, unless he too was surprised by the harsh order). Secondly, it seems to indicate that if you do not accept the amount suggested by SEBI executives for filing consent terms, then the penalty decided by the adjudication officer could be harsher.

We at Moneylife would laud both these objectives if these were, indeed, the reason for the harsh penalty; but facts suggest otherwise. As we have repeatedly pointed out, there is no consistency in SEBI's actions. For instance, when SEBI officials demanded Rs25 crore as payment under consent terms for burying the Zee group's massive involvement in the Ketan Parekh scam, the group quietly went by the adjudication route and was let off with a mere warning.

This remains a fit case for investigation against the then SEBI member, TC Nair, by the Vigilance Commission. In fact, Mr Nair has similarly closed the case against the Central Depository Services Limited (CDSL) without even a warning, in what is infamous as the IPO scam. Yet, Manmohan Shetty’s little haste in selling his shares merits a Rs1 crore penalty! There might be a silver lining in this strangely harsh order of the regulator. Maybe someone in government will wake up to the need to ensure that SEBI’s adjudication and investigation processes, and its regulatory actions and consent orders, are fair, transparent, detailed and open to public scrutiny. — Sucheta Dalal